DBRS Confirms Bank of Hawaii Corporation at A (low); Trend Stable

DBRS has today confirmed all ratings of Bank of Hawaii Corporation (BOH or the Company) and its related bank subsidiary, including the Company’s Issuer & Senior Debt rating at A (low). The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

BOH’s ratings are underpinned by a strong banking and deposit franchise in Hawaii, continuing above-peer group profitability and still strong asset quality. The ratings also consider the Company’s dependence on the Hawaiian economy, its modest growth prospects, and the relatively large relationship exposures within its loan portfolio. The Stable trend reflects DBRS’s view that the Company remains well positioned to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Over the past year, BOH has prudently managed its balance sheet given the economic recession and remains in a position of strength to serve its clients and communities. Specifically, the Company has increased capital, liquidity and loan loss reserves to keep the franchise on very solid footing. Until the economy recovers, management expects to remain focused on soundness of the franchise rather than trying to maximize earnings. As a result, earnings may suffer in the short- to intermediate-term, but these actions constrain downside risk to the franchise.

Even though financial performance has slowed from historically high standards, results remain strong, especially relative to other banking peers. Indeed, the Company reported net income of $36.0 million in the first quarter, which was down from $39.3 million in the previous quarter and $57.2 million in Q1 2008. On a sequential quarter basis, strong mortgage banking results and a $10 million pre-tax gain related to the sale of the Company’s equity interests in two leveraged leases were more than offset by significant margin pressure, higher loan loss provisioning and a $1.5 million legal contingency reserve. Showing diversity of earnings, BOH’s fee-based businesses contributed a sizeable 43.8% of total revenues. With visitation levels to Hawaii down and the economy still shrinking, DBRS expects financial results to be pressured, but the Company should remain solidly profitable.

Even with deterioration, asset quality remains strong and compares favorably to peers. The weakening economy has contributed to higher levels on nonperforming assets (NPAs) and net charge-offs (NCOs) with a larger deterioration seen in the most recent quarter. In Q1 2009, one large loan to a national mall owner, one large residential mortgage and four land loans that went to non-accrual status were the primary drivers for the increase in NPAs. Specifically, NPAs increased to a still low 0.64% of loans and leases in the first quarter compared with 0.23% in the previous quarter and 0.09% in Q1 2008. Meanwhile, NCOs increased to 0.88% of average loans and leases from 0.64% in the fourth quarter, primarily led by higher home equity and C&I charge-offs including $3 million related to the national mall owner. Given the economic slowdown, BOH provisioned an incremental $10.9 million more than NCOs increasing the loan loss reserve to a robust 2.12% of total loans and leases. With higher unemployment, declining real estate values and lower visitor levels, DBRS expects further erosion in asset quality at the Company.

Speaking to franchise strength, BOH has seen exceptional deposit growth over the past two quarters as the Company benefits from a flight to quality and attractive in-market deposit rates. Specifically, all deposit categories except for time deposits had higher balances in the first quarter. With the loan portfolio shrinking, the excess funding was deployed into U.S. Treasury securities and funds sold to the Federal Reserve. With this conservative balance sheet positioning, the Company’s net interest margin (NIM) came under pressure contracting 67 basis points to 3.76% during the quarter. BOH has reduced deposit pricing and will most likely buy some longer duration securities, which should help NIM.

Balance sheet growth pressured capital metrics, but capital remains solid. As a result, the Company’s Tier 1 leverage declined to 6.94% from 7.30% during the quarter. However, pointing to the low-risk assets added to the balance sheet during the quarter, the tangible common equity to risk-weighted assets improved 119 basis points to 12.47%. BOH remains focused on controlling risks and maintaining a strong balance sheet during the economic recession.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $11.4 billion in assets at March 31, 2009.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.